The merger of Commonwealth Edison of Chicago parent Unicom Corp.and Philadelphia-based PECO Energy Co. will create a company so bigit will take two CEOs to run it, at least initially.

The companies agreed to a merger of equals creating anas-yet-unnamed holding company worth $31.8 billion ($15.2 billionin equity market value; $16.6 billion in debt and preferred stock).For the first years, the CEOs of the merging companies agreed toshare the helm.

The new holding company will be the nation’s largest electricutility based on about five million customers, and it will havetotal revenues of $12.4 billion. The combined company will be thenation’s fourth largest power generator, with generation exceeding22,500 MW and will be a leader in the growing U.S. wholesale powermarketing business. Based on current equity market values, the newcompany would rank third in the industry with a marketcapitalization of $15.2 billion.

“This merger catapults the combined company into the top tier ofnational energy companies,” said PECO CEO Corbin A. McNeill Jr. “Webelieve in the competitive and strategic value of size and scopewhich will increase our future earnings growth rates, creatingvalue for shareholders. We will have a strategic portfolio oflow-cost generation assets and significant transmission anddistribution operations covering two of the top five metropolitanareas.”

“The merger creates world-class generation and power marketingbusinesses,” said Unicom CEO John W. Rowe. “It creates a base fromwhich we will build a leading energy delivery business andestablish ourselves as a significant competitor in the emergingretail energy marketplace.

“Both PECO and Unicom are experienced operators of nuclear powerplants. We intend to be the premier nuclear operator in the nation.We also intend to add more clean, low-cost generation to our energyportfolio.”

Rowe said his first priority will be to improve ComEd’s service andreliability. The utility stumbled this summer when it was faced withhigh demand and came under fire from the City of Chicago. In August,the Chicago Board of Trade had to close an hour early one day due to apower outage on the ComEd system (see Daily GPI, Aug. 13).

The companies expect to achieve annual cost savings of about$100 million in the first year, which will grow to more than $180million by the third year. Sixty percent of these savings will comefrom regulated operations and 40% will come from unregulatedoperations. The deal is expected to be accretive in the first yearafter closing. Workforce reductions of about 5% of the combinedcompany’s 22,500 employees will occur through attrition andseparation packages.

Deutsche Banc Alex. Brown analyst Edward Tirello said he likesthe combination because it creates the biggest fleet of nucleargenerators in the country. The new company will enjoy significantcosts savings by holding 20% of the country’s nuclear generation.”ComEd already said it is keeping its 10 nukes and it already hasgotten its capacity factor from 50% to 90% over the last two years.Now if you would put PECO’s expertise on top of that I think theycould run fabulously.” PECO has Philadelphia Electric’s plants andother plants it has acquired around the country. The company alsoowns plants with British Energy through AmerGen.

Merrill Lynch analyst Steve Fleishman also said he likes thedeal because of the substantial generation position the new companywill hold in key markets. The deal also creates a “good”distribution network.

McNeill and Rowe will be co-CEOs until Dec. 31, 2003. McNeillwill oversee generation and power marketing operations, and Rowewill oversee transmission and distribution operations, as well asunregulated retail enterprises.

Tirello said the new company will be too big for one person tomanage right off the bat. “It’s a monster. It will create a bigcompany, but I think it will still have to get bigger.” Hesuggested a future acquisition of the combined company might be autility situated geographically between the merger partners’existing utilities, such as Pennsylvania’s Allegheny Power.

The combined company will be headquartered in Chicago, and thegeneration and power marketing operations will have headquarters inthe Philadelphia region. Unicom’s and PECO Energy’s electric andgas utility operations will remain separate subsidiaries. The newholding company will be incorporated in Pennsylvania.

The merger is conditioned upon shareholder and state and federalregulator approvals and is expected to be completed in 12 months.Shareholders may receive cash or stock in the new company. Thetransaction will be accounted for as a purchase. Each shareholderof PECO Energy may choose to receive for each PECO Energy shareeither one new holding company common share or $45 in cash, subjectto proration; and each shareholder of Unicom may choose to receivefor each Unicom share either 0.95 new holding company common sharesor $42.75 in cash, subject to proration. The cash prices representa premium of about 11% to PECO Energy’s and Unicom’s ten-dayaverage trading prices through Sept. 22.

Unicom shares closed Monday down 50 cents to $37.94/share, whilePECO shares closed down 62 cents to $40.38/share on rumors of themerger. Thursday, Unicom closed at $36.25, down 81 cents; and PECOclosed at $36.44, down $1.69, following the deal’s announcement.

Suppliers Line Up for Choice

In other ComEd news, four retail electric suppliers are gearingup to compete for customers on the utility. The four suppliers,ready as of Sept. 17, include Central Illinois Light Co., IllinoisPower Co., NewEnergy Midwest and Unicom Energy Inc. The companiescan begin serving customers in ComEd’s service territory Oct. 1,the first day of customer choice in Illinois.

The four suppliers have completed both the ComEd registrationprocess and the requirements mandated by the Illinois CommerceCommission (ICC). The list of suppliers includes both AlternativeRetail Electric Suppliers (ARES) and Illinois jurisdictionalutilities. ARES must be certified by the ICC and complete ComEd’sregistration process to submit switching requests for customers.Illinois utilities only need to complete ComEd’s registrationprocess because they already operate in the state of Illinois,which means they have fulfilled ICC requirements.

Five ARES have been certified by the ICC to sell electricity tonon-residential customers in Northern Illinois. They include EnronEnergy Services, NewEnergy Midwest, Nicor Energy, Peoples EnergyService Corp. and Unicom Energy Inc. Two more ARES, Duke Solutionsand Reliant Energy, have applied for certification in NorthernIllinois pending ICC approval.

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